Sunday, February 3, 2013

As the Eurozone tries to turn the corner, one member nation continues to lag

It increasingly looks as though the Eurozone's overall economy is close to bottoming out (as discussed here). This improvement may turn out to be transient, but it's real nevertheless. As an example, the January manufacturing PMI numbers are still in a contraction mode, but the trend is no longer downward.

Source: Markit

Markit (Chris Williamson): -
The Eurozone economic picture continues to
brighten, with the final reading of the manufacturing
PMI for January coming in ahead of the earlier flash
estimate. The survey continues to signal an overall
deterioration of business conditions, but rose to an
11-month high to suggest that the industrial sector
is close to stabilising after contracting throughout
much of last year.

The improvement was led by Germany, which saw
the strongest gain in output of all eurozone states,
but rising exports are also helping to revive the
manufacturing sectors of other countries, most
notably Spain and Italy.

There is however a major exception to this trend - one that exists in the Eurozone's "core". The exception is France, whose economic conditions continue to deteriorate.

Markit (Jack Kennedy): - The deterioration in French manufacturing sector business conditions continued in January. The fact that new orders fell at the sharpest rate for nearly four years is a particularly concerning development and suggests further steep falls in output are likely as we progress throughout the first quarter. Confidence seems to have evaporated in the face of an increasingly uncertain economic environment, leading manufacturers to make sharper cuts to employment, purchasing and input stocks in the latest survey period.

In fact the trends in the composite PMI measures for France vs. the rest of the Eurozone have diverged.

Source: JPMorgan

Poor competitiveness continues to be one of the key issues (as discussed here).

JPMorgan: - A longstanding issue for the corporate sector is its lack of
competitiveness. This concern is best illustrated by the European
Commission survey data, which show that an increasing
number of French firms are expressing a lack of competitive
advantage in both domestic and foreign markets. The French
trade deficit seen since mid-2004 partly corroborates this argument.
Competitiveness issues are part of a broader problem
facing France: anemic potential growth (the government assumes
potential growth at 1.6% oya) and the structural changes
that would be required to raise it.

With France's government now representing almost 57% of the nation's overall economic activity, the much needed austerity measures will be a major drag on the GDP growth going forward. And some of the Socialist government's heavy-handed policies (particularly with respect to taxation) are not helping either.